Business and management

Music streaming

Fighting the low notes

GIVEN the music industry’s decline over the last decade, one might expect any firm paying musicians to be championed. That has not always been the case with Spotify, a service that streams songs online. Some artists, alleging Spotify writes tiny cheques, have pulled their songs off the service. Others have directed pointed insults akin to what might be heard in a rap song. Thom Yorke (pictured) of Radiohead, a popular band, has described Spotify as “the last desperate fart of a dying corpse”. Last week Spotify launched a new initiative to win over skeptical musicians. Part of that involves becoming more transparent about how much artists are paid for their work.

Spotify, which offers consumers a free version of its service with advertisements or a “premium” service with no adverts for around $10 a month, pays fractions of pennies to rightsholders each time a song is streamed. It distributes around 70% of its revenues back to rightsholders, and splits that amount according to songs’ popularity. On average, for a million plays of a song, Spotify pays between $6,000 and $8,400. Since 2008, when Spotify launched, it has paid out around $1 billion in royalties, and around half of that has been in 2013 alone.

Two factors—split and scale—explain why musicians may feel they receive so little from Spotify. Royalties are paid to the record label or music publisher, which goes on to split that with the artist. In other words, what trickles down to the artist is less than what Spotify is paying for a musician’s work. How much the artist receives depends on the terms of his contracts.

As for scale, Spotify's audience is still relatively small. As of March it had around 24m users globally, 6m of which are paying subscribers. In July an anonymous classic rock album received around $17,000, but according to Spotify, that same album could receive $87,000, if the firm grows to have 40m paid subscribers.

Spotify-skeptics should consider the alternatives. YouTube is a popular streaming service, but it pays far less per song. Piracy continues to cost musicians dearly. Spotify’s free service may appeal to some music pirates, which means artists may receive payment that might otherwise be lost to illegal file-sharing.

As part of its effort to become more artist-friendly Spotify will also start making data available to show artists how many times their songs are played, where and by what sort of user. In addition, bands will be able to start selling concert tickets and merchandise—an increasingly important part of their income—through Spotify.

In the meantime, Spotify hopes to add more paid subscribers because they generate most of its income (it loses money on its ad-supported free tier, according to analysts). In spite of Spotify’s growth over the last five years, the firm, which is valued at around $4 billion, is still not profitable, because it is spending so much to expand into new markets.

In Spotify’s new campaign to win over artists it makes the case that as more users sign up, Spotify’s royalty payments will go up, boosting artists’ income. In other words, Spotify hopes musicians will start spending their time boosting, and not blasting, it.

Readers' comments

I wonder if Spotify has considered expanding into the music publishing business and/or agency business. If they help the artists eliminate the middle man, the artists would get more and be happier. And since they are already generating income from the rest of their business, they could get by with much smaller margins.

I think the post misses the real issue, which is the nature of advertising. On a regular radio, advertisers pay based on the ratings and demographics of the station and royalty rates to artists reflect the scope of that audience. On Spotify and other streamers, the ads aren't calculated for the whole audience; the rates aren't broadcast rates. For artists to make money, the advertising method of streaming would need to shift from targeted to mass. That can't happen because broadcast media aggregates ad money into a single stream of songs.

Another way of looking at Spotify is that, as of now, it's extra income. Regular radio pays much better but you have to get played on regular radio, which is uncommon.

Ever been to a session where the programming companies test the songs to play? They're horrible. They play short snippets for roomfuls of people who check boxes like no, yes, maybe, etc. They select from the same relatively small piles of songs that fit that station's format. So most artists wouldn't get played much if at all.

And of course it's mostly the hits that get played through any method so most of the money Spotify pays out goes to a few acts.

From the point of view of the user, Spotify is a service that delivers some added value, but only when the price paid is zero. The good news for Spotify is that it's got a lot of room for improvement.
It can enhance the browsing experience, the sound quality, the catalog, the recommendations. Youtube (as well as Amazon) is notably better in this respect.
Spotify has the potential to deliver the whole added value of a giant, sophisticated database. That would make music listening a new experience, something that could attract new listeners, convince the other ones to pay a significant price for the service, and make musicians happy.

There is a tense tug of war that Spotify needs to overcome. Whenever an artist pulls their music the users mainly blame Spotify not the artists. How many cancel their paid subscription whenever they look over their playlists and see songs grayed out and unavailable? They don't care about bottom lines for the artist. They want their music. The opinion of the average subscriber may be something along the lines of "I paid for music you can't give me so I am going somewhere else." Or at the least reverting to a free subscription. It isn't a rational response but there is seldom a rational collusion of interests in the music industry.

In the US, there's an issue w/ internet royalty rates greatly disadvantaging the rights holder. I believe there is a real opportunity here. These steps may put Spotify on the right track. Why can't we all get better together?